Public vs. Private Companies: How Do They Differ?

By AllBusiness.com | Yahoo Small Business

Most likely the company you own is a private company, one whose stock is held by one shareholder or a small group of shareholders. If you're contemplating taking your business public (meaning your company's stock would be traded by the public on an exchange such as the New York Stock Exchange or NASDAQ), you'll need to know the advantages and disadvantages of both options.

Private Company

A private company can be a corporation, a limited liability company, a partnership, or a sole proprietorship, as long as the shares are privately held and not traded publicly.

Although private companies are legally required to file certain documents with their state and follow required compliance laws for shareholders, public companies must follow strict government regulations.

Private companies are not required to publicly disclose financial information, while public companies are required by the Securities and Exchange Commission to file an annual report documenting their performance in detail.

Because private companies don't have to disclose financial information, they can focus on long-term growth instead of making sure shareholders are getting their quarterly dividends.

Private companies don't need shareholder approval for operational and growth strategy decisions made by the company, as long as that is stated in their corporate documents.

Public Company

Public companies must inform shareholders about and get approval for the company's operations, financial performance, management actions, and other decisions.

Going public is expensive, and there is unlimited liability for a company's owners.

Public companies may have an easier time raising large amounts of capital by selling securities. Investors are more likely to invest in a public company because there is less risk and more potential to reap large rewards.

Public companies can return to the stock market and raise more capital via a secondary stock offering or by issuing a bond.

Public companies must comply with the rules established by the Sarbanes-Oxley Act, which was enacted to protect investors. The act contains a myriad of regulations concerning board responsibilities and requires the Securities and Exchange Commission to administer rules that comply with the law. For more information on the rules and steps to going public, go to www.sec.gov.

Public companies can go private by having the owners buy back shares from the shareholders, whether they are members of the public, another company, an individual, or a small group of investors.